 "Jeremy East")
While global commodity markets are suffering from low demand and oversupply, India is undergoing some interesting regulatory changes, including the gold monetisation scheme. Standard Chartered Bank, which has more than 150 years' experience in the business, offers a variety of commodities including precious and base metals, energy products and agricultural products, says the global commodities, cycle is "at or near the trough" phase in terms of prices. Jeremy East, managing director, head, metals trading & commodities, Northeast Asia and Greater China, financial markets, Standard Chartered Bank speaks to T E Narasimhan & Gireesh Babu on the global commodity trends and their likely impact on Indian market. Edited excerpts:
Do you think metals and commodities, which have fallen significantly, have seen their worst?
There are two sides of commodities - mining and energy production. Oil is probably in a slightly worse condition but mining companies are definitely going through a process of closing down production. In the short-term, both markets are still in oversupply, with significant above-ground inventory.
Gold is in a slightly different situation. Production has started to decline and we are seeing it falling by around three or four per cent this year and next year. Gold is a couple of years ahead of the general trend of commodities markets, in terms of supply. This is potentially more supportive for the price. We are anticipating steadier gold prices this year.
How do you see India handling gold market?
India's context is very interesting because this used to be the country where oil had an impact on gold. Back in 2012-13, India had to impose restrictions on gold import because, being the second-largest import basket item after oil, it had upset the balance of payments. Now, with oil prices down from $100 to $30, everyone realises that no matter what India will always consume at least 700 to 800 tonnes of gold (every year).
Most of the gold comes from offshore. There is now a window of opportunity for the government to promote and create a domestic gold market and bring some of the existing stocks in India into circulation. It should be done now because it takes time to develop a domestic market and to get the basic infrastructure in place. It definitely appears that the government is supportive of creating a domestic gold market for the industry and all these new initiatives that are coming to support this view. I can see the domestic Indian market succeeding the same way the China market did.
How do you see iron ore market, going forward?
Prices of iron ore have dropped significantly. Iron ore is a little bit similar to oil. The production of iron ore is still continuing at a fast pace. Recently, we have seen new iron ore producing mines in Australia coming on stream and exporting to China. Even when prices are down, production doesn't seem to be declining. That potentially will have an impact on India where we see a big steel and iron ore industry.x
From a financer's perspective, is Indian market a good bet now?
My personal view, not the Bank view, is that in India the mood is significantly more positive than it was over the previous years, following the top-level changes in the country. A lot of new initiatives, gold being one of them, have been introduced. This is sending a positive message to the world. I am excited about the gold market because I have seen how the market developed in China, growing from a lower base to becoming a huge market it is today, and India has the same potential. India has good infrastructure in place but it doesn't have a gold exchange, which China does. One of the issues in India is that gold market is largely unregulated. There is no central point, whereas if you look at China, they have the gold exchange, and in London they have the London Bullion Market Association.
One of the main reasons behind commodity rout is said to be unwinding of carry trade globally and money flowing back to the US. Is unwinding of carry trade over for now?
Interest rates everywhere look to be heading lower. I think the recent market turmoil and problems related to the volatility of the Chinese currency may cause the US Fed to think carefully about interest rates adjustments, because there is quite a high expectation that they will be increasing the interest rates in March. In the last six weeks, we have seen incredible volatility in the market. I am sure the Fed is watching it very closely. For many other countries, we are seeing lower interest rates, China especially. I think it would continue.
What is your overall outlook for commodity markets?
What we are seeing across commodities is oversupply and lower demand. Commodity is a cyclical market and we are probably at or near the trough in terms of prices. Supply doesn't drop that quickly because it takes a lot of time and money to shut a mine. Mining companies need to be sure that prices will continue to be low before they decide to close. And they are going through this thought process currently. Lots of mines will continue to close. The key factor now is demand.
If China's economy grows at 6.5 per cent, with India's and the US' growth coming back, the first thing the market needs to do is to run down the existing stock. Once that demand picks up, then we start a new cycle. It is difficult to say when that is going to happen. Will it happen next year or in 2020? It is hard to say.
